Up in Smoke

July 1st marks the start of recreational sales of marijuana in Massachusetts and you may be wondering what you need to know for your business. This date comes after significant delay and a number of still unresolved controversial aspects of the new law. Massachusetts now becomes the eighth state to permit recreational marijuana under state law; a group of states that includes our neighbors in Maine. There is no question this is a nationwide trend, with now over one-fifth of the U.S. population living in states with laws that permit recreational marijuana.

A little history first. After becoming illegal in 1911, Massachusetts voters have taken marijuana to the ballot box on three occasions. In 2008, voters passed an initiative petition that enacted a law decriminalizing the possession of a small amount of marijuana by adults, meaning that people caught with small amounts could not be arrested. Then, in 2012, voters once again took to the ballot to legalize the medical use of marijuana. Fast forward to November 2016 when the voters spoke by voting to legalize marijuana by a fairly wide margin of 54% to 46%.

So how will this new law impact real estate? There are a few considerations to keep in mind.

The first thing to consider is that although legal under state law, marijuana remains a Schedule 1 illegal substance under federal law. Previously, the federal government has taken the position that it will not enforce federal law in those states that permit recreational marijuana usage. However, the current Attorney General has announced a shift in policy giving state U.S. Attorneys discretion to prosecute. Whether that happens in Massachusetts remains an open question. So far, we have not seen any enforcement, yet suggestions have been made that enforcement may focus on the financing or commercial growing operations - not something that a typical homebuyer or seller is going to be concerned with. This means that right now the banking industry, insurance industry, mortgage, and other industries do not have the certainty and predictability that they would like.

How will the legalization of recreational marijuana affect landlord-tenant relationships and the rights of each party? As written, the law will allow for landlords to prohibit the smoking of marijuana on their property, but owners should be sure to check the language of their lease agreements to make sure the issue is covered. Just as a landlord may prohibit smoking of cigarettes in an apartment, they may also prohibit smoking of marijuana. In 2017, MAR added a residential lease addendum to the forms library for this purpose.

How will the new law affect residential transactions?

Similar to the laws in Colorado and other states, the law will permit residents to cultivate a certain amount of the drug in their homes for personal use. When listing a home where cultivation is occurring, it is prudent to have a conversation with the seller prior to any showings or an open house. A seller should consider removing or relocating plants and equipment during the listing period.

Property Insurance: Most every property insurance policy reserves the insurer’s right to deny coverage for causalities resulting from “illegal” activities. Let’s say that a tenant’s marijuana grow lights are located in a basement grow room and cause a fire that damages a home. Arguably, based on the fact that marijuana growth is an “illegal” activity, an insurer could try to deny coverage for the casualty.

Mortgage loan documents: Most specifically prohibit the borrower’s use of funds for any “illegal activities." From any traditional lender’s perspective, marijuana is an “illegal activity", and a borrower could be in violation of their loan terms particularly in the case of a grow facility. This fact has become apparent to many commercial property owners as many lenders in other states such as Colorado have actively called notes for landlords entering into commercial leases specifically permitting marijuana businesses. Many of these landlords were quickly forced into the secondary markets to refinance.
Disclosure: A seller growing marijuana in their home is not necessarily a mandatory disclosure. There may be related issues that may rise to the level of mandatory disclosures. There may be instances where the homeowner has conducted modifications to the plumbing or electrical systems in the home. If this work is done without the appropriate permits and by licensed professionals, it will likely require disclosure. It is best to have the discussion about disclosure upfront and early in the process with your seller clients so you can review your disclosure considerations.
Mold issues: Another consideration may be the potential for mold. Indoor grow systems are traditionally water-based and often require standing water. In addition, more sophisticated grow facilities will increase the growing area’s overall humidity to improve growing conditions. Both of these situations increase the possibility of mold presence within the home and additional care needs to be taken by a property inspector or other expert as they are reviewing the property. When dealing with real estate—an industry that is intertwined with federal law in so many respects—it is important that Realtors® help their clients understand the full implication of the decisions they make regarding their property.